Tales Of The Trump Depression, Con't

So, Kudlow was right, it's a V-shaped recovery, the Trump Depression is over and we're all fine, right?

Employment stunningly rose by 2.5 million in May and the jobless rate declined to 13.3%, according to data Friday from the Labor Department that was far better than economists had been expecting and indicated that an economic turnaround could be close at hand.

Economists surveyed by Dow Jones had been expecting payrolls to drop by 8.33 million and the unemployment rate to rise to 19.5% from April’s 14.7%. If Wall Street expectations had been accurate, it would have been the worst figure since the Great Depression.

As it turned out, May’s numbers showed the U.S. may well be on the road to recovery after its fastest plunge in history.

“It seems the damage from the nationwide lockdown was not as severe or as lasting as we feared a month ago,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman.

Trump dropped a surprise news conference to gloat about the figures and declared the economic depression over before it began.

So is he right? And will this win him reelection in November if the economy adds back the remaining 19.5 million jobs lost this spring?

Well, it does prove that reopening businesses during a pandemic forced enough Americans back to work that job hemorrhaging was stanched. The problem with tourniquets that tight is they can still cause you to lose a limb.

This is telling. Look at the where the jobs were gained v. lost in May

GAINS
Restaurants: +1.4 million
Construction: +464,000
Healthcare: +312,000
Retail: +368,000
Manufacturing: +225,000
Business: +127,000

LOSSES
Government: -585,000
Hotels: -148,000
Air transport: -50,000

— Heather Long (@byHeatherLong) June 5, 2020

The gigantic "if" here is "If the recovery can continue like this."

I don't think it will.  I think this is the biggest Dead Cat Bounce in job numbers history.

Once again, the Labor Department acknowledged making errors in how it classified people as employed and said the real May rate is worse than the numbers indicate. But the government made the same mistakes in April, and together the figures still show the job market is improving.

Friday's report made it clear the government continues to struggle with how it classifies millions of workers on temporary layoff. The Labor Department admitted that government household survey-takers mistakenly counted about 4.9 million temporarily laid-off people as employed.

The government doesn't correct its survey results for fear of the appearance of political manipulation.

Had the mistake been corrected, the unemployment rate would have risen to 16.1 percent in May. But the corrected April figure would have been more than than 19 percent, rather than 14.7 percent.

Oops.

Gold Rush, Part 16

Gold still up to a record high at $1,317, dollar still down to a six-month low against the euro.  The Japanese yen currency intervention by the Bank of Japan has lasted for two weeks and change, and the yen is now back to the same level it was at and continues to fall.

Stocks meanwhile just came off the best September in decades in the ultimate Dead Cat Bounce.  Just the threat of Helicopter Ben's Magic Printing Press is now driving the markets.  QE2 is now all but assured.

When will Ben pull the trigger?  When he does, the world changes forever.

The Supersonic Stock Market

The stock markets have gone supersonic, literally, as in above the range of hearing:  high frequency, low volume.  The details are really grim:

The latest Abel/Noser analysis has been released and according to the data analytics firm just 112 stocks now account for half of the day's volume, the top 20 stocks account for 26% of all domestic volumes, and the first 1,029 stocks are responsible for 90% of all volume, meaning the remaining 17,349 account for just 10% of all dollar traded. These are also the stocks where HFT will never tread, so if anyone wishes to avoid the HFT marauders, just stay away from the top names. And since the last time we did an update, there have been some notable changes in the top 10 most traded names: in June, courtesy of the GOM catastrophe, BP and Exxon were solidly in the most traded stocks. Since then they have fallen way down in the listing, having been replaced with two other M&A candidates, HP and Potash, in 7th and 10th place, respectively. Intel has also done a great job of getting raped daily by HFTs, moving up from 19th place, to 8th. Yet not surprisingly, as the total volume of shares has fallen off a cliff since June, the 16th most active stock, Google, just barely makes the $1 billion in principal traded day cutoff at 16th place, while in June, all of the top 20 names were trading above $1.2 billion notional daily. And once again, just like every other month, the most actively traded security continues to be the SPY. As ever more of the volume is concentrated among fewer and fewer stocks, it is certain that one day, when a top 10 name crashes, will crash the the entire market, which continues to trade near record-high implied correlations.

And a lot of that is coming from the fact that only the Big Casino investors are left.  Everyone else has gotten out of the market, particularly hedge funds.  Outflows from the stock market are reaching critical levels.  The Fed is inflating the balloon as fast as it can, because at this point any sort of real downtick to the market is going to be a 400 point drop.   We're approaching maximum melt-up territory here.  Treasury keeps dumping in action to keep the Dow going up and the few folks who are left are following along.  Everyone else is off the roller coaster or worse, playing buy and hold.

The Fed's got to keep the markets going until Election Day.  Then again it was just about this point two years ago that John McCain lost the election so who knows.  If things get out of hand and the market breaks, well, all bets are off.

It's only a question of when the hammer falls.

Meow, Boing

Quite a Dead Cat Bounce we've had over the last three days.  You'd almost think we were out of that whole double dip danger zone.  S&P 500 up 65 points since Tuesday's close.

You'd be wrong, but you'd almost think that.  Remember, the markets were all over the place just before the crash in '08 too.

Drop The D-Word On Them

D-D-D-D-Depression, as David Rosenberg makes his case.

Writing in his daily briefing to investors, Rosenberg said the Great Depression also had its high points, with a series of positive GDP reports and sharp stock market gains.

But then as now, those signs of recovery were unsustainable and only provided a false sense of stability, said Rosenberg.

Rosenberg calls current economic conditions "a depression, and not just some garden-variety recession," and notes that any good news both during the initial 1929-33 recession and the one that began in 2008 triggered "euphoric response."

"Such is human nature and nobody can be blamed for trying to be optimistic; however, in the money management business, we have a fiduciary responsibility to be as realistic as possible about the outlook for the economy and the market at all times," he said. 

The 1929-33 recession saw six quarterly bounces in GDP with an average gain of 8 percent, sending the stock market to a 50 percent rally in early 1930 as investors thought the worst had passed.

"False premise," Rosenberg said. "And guess what? We may well be reliving history here. If you're keeping score, we have recorded four quarterly advances in real GDP, and the average is only 3%."

Rosenberg's warning comes as a slew of major analysts—Goldman Sachs and JPMorgan among them—have slashed GDP projections for 2010 to the 1.5 to 2 percent range.

Rosie's just being honest here.  We've been in a hole going on 32, 33 months now.  Today's housing news just confirms the worst is still ahead and that the "Obama boom" was nothing more than the mother of all dead cat bounces.  We never got out of the "recession" of 2008, really.

If anything, today's news all but proves it.  We're in a depression and it's well past time to admit it.

In Which Zandar Answers Your Burning Questions

Digby asks:

Do you get the feeling that when the ruling elites talk about unemployment that they've never been unemployed?

Unemployment to professional beltway types means "the time period you have to live off of severance before you can get a new think tank/Village bobblehead/lobbying/boardroom/college president/'Hey, check out who's on our letterhead!' position" so the answer to that is "yes, pretty much."

Sadly I think they honestly assume that it can't be bad out there when the Ruling Elite unemployment rate is really more like five percent, so really Americans are doing just fine.  Besides, people are still buying things like iPads and Prius hybrids and Starcraft 2 on the PC so the economy has to be pretty good.  I mean the Dow's still over 10k even after a horrible week so we're a little slow but hey, the guys in charge have it under control.

Right?

Bounce Chat Mort

That's French for "dead cat bounce" kids.  Yesterday's 400 point gain in the Dow and 3-4% gains in European markets are already looking like they're going to completely fall apart as the European Trader has finally figured out what this weekend really means:  unlimited moral hazard!

That's right folks.  You know that the EU is going to now throw hundreds of billions of euros at any EU member that faces problems.  The EU has to create those euros out of thin air, the way we're doing here with the Fed and the dollar.  That means the value of the euro compared to other currencies is going to drop, guaranteed.  And that's as close to a sure bet as you're going to get.  Europe is now betting against the euro itself!  Tyler Durden explains as Eurobanks are pulling a Goldman Sachs.

Zero Hedge has received confirmation that several of the largest French banks are now actively shorting the euro to take advantage of globalized moral hazard, which with every ensuing bailout does nothing but make the bonuses of French FX traders surge. In other words, the very banks that Europe is bailing out are betting more and more aggressively with each passing day against Europe's own survival! Even George Soros has shed a tear of pride in how beautifully his initial plan to take on the BOE has mutated for the Bailout Generation.

And overnight, the traders from the imaginary CMC, and other all too real French banks (and now US hedge funds), are succeeding, as the last traces of this weekend's $1 trillion bailout are long forgotten: futures are plunging, Asia is collapsing, the EURUSD is probing a 1.26 handle and we see it easily going back down to 1.25, even as gold surges.

We anticipate another record bailout to be announced by Europe within the month as Europe now has no other choice. And each subsequent bailout will only lead European banks to bet even more aggressively against the survival of Europe, which destroys more and more European taxpayer capital. Welcome to Global Moral Hazard. 

It really is that simple.  Everyone's betting that the value of the euro is going to continue to crash.  So...the value of the euro continues to crash!  And everyone who's along for the ride is making money hand over fist doing it.  It's a self-fufilling prophecy with good old self-interest generated greed thrown in.  Win-win for the trading houses, lose-lose for everybody else.

Dow Futures are down 100+ right now and falling.  Asian stocks are down 1-2%, Euro stocks are down 2%, and things are going to get fugly from here on out.

The near trillion dollar bailout lasted one day, folks.  Buckle up.

The Kroog Versus The Eurovision Bailout Contest

Dow up 400 at one point, now up 350ish.  Almost put back the carnage from Thursday.  Almost.  Krugman weighs in on the bounciness coefficient of the Dead Cat in question:

So there’s something substantive here; it’s not just a matter of buying time during which nothing good will happen.

That said, I wonder about magnitudes. I’m sure that the ECB has no intention, even now, of letting inflation rise 200 basis points (even though it should welcome that development.) And Greece, still the epicenter of the crisis, doesn’t gain much from the credit lines. So does a drop of more than 500 basis points in the yield on Greek 10-years make sense? I don’t think so.

The good news here is that for the first time in this crisis, European policy makers have gotten ahead of the curve, acting more strongly than almost anyone expected. That’s a shock, and it has awed the markets. But I still don’t think it’s nearly enough.

Neither do I.  When this particular can of Monster Energy Drink wears off, the market's going to have a hell of a headache.

Trading Error My Ass: The Mother Of All Dead Cat Bounces

A little after 2 PM this afternoon in New York, the stock market completely crashed and the Dow was down nearly one thousand points for a couple of agonizing seconds.  At 4 PM, the market closed down around 4% for the day, the Dow being off 348 points.  CNBC says it was...a trading error.

In one of the most dizzying half-hours in stock market history, the Dow plunged nearly 1,000 points on worries about the spreading European debt crisis before paring those losses in an equally rapid rebound.

A possible culprit for the drop was a trader error in which someone entered a "b" for billion instead of an "m" for million in a trade. Multiple sources confirmed the report to CNBC and CNBC.com

Oh suuuuure it was.  Gold hitting $1,200, the Euro falling at about a buck and quarter per and of course Greek Fire had nothing to do with it.  It was all a mistake, ladies and gentlemen.  Dow drops about 1,000 points, then jackknifes UP 700.

The fundamentals of our economy are strong!

The apparent trigger for the massive selloff, which began shortly after 2 pm ET, was the approval of austerity measures by the Greek Parliament, which sparked renewed rioting in Athens. 

"There is simply a growing recognition that Greece has got to default," banking analyst Dick Bove told CNBC.com. "The riots in the streets showed the decision to repay the debt was not going to be made by the people in Germany, France and Switzerland—it's going to be made by people in Greece and they're not going to repay it."

You think?   Hell, Zero Hedge is down hard right now.  ironically Roubini.com reposted ZH's warning from John Taylor that the Euro was toast.

Europe is dead. The European nations are the victors, and the way ahead will be one hell of a mess. Without taxing and borrowing power, there is no way to square the inter-euro trade balances between the countries except ‘internal devaluation,’ which means years of deflation and poverty for the voters – and protestors – of the deficit countries. Our pencil pushers and Excel experts have made lots of projections on the Greek situation and can find almost no possibility of success. The EU/IMF team projects Greek debt at 149% of GDP when this rescue ends, but their nominal GDP estimates are incredibly optimistic when salaries and jobs are cut dramatically. We see a 20% decline over the three years as a good outcome, the debt would stay the same, and the ratio goes to 186% of GDP. Almost like Japan, but foreigners own the Greek debt – no way! This rescue reminds us of Bob Rubin’s rescue of Russia in July 1998, which lasted about one month before the whole house of cards collapsed. We knew that one couldn’t work, and this one can’t either. It might take longer, but the euro is finished. 

Goodbye euro, hello drachma, peseta, lira, and the others. The world had hoped for more, none more than the Europeans themselves, but now we are all left to pick up the pieces.

Scary, scary ass day, folks.  I'm betting that the plunge Protection Team stepped in as soon as this meltdown became apparent and made some BUY phone calls to some big, big people.  They came through, erasing two-thirds of today's burnoff.  it won't last real long.  For a brief couple of moments the whole world saw everyone else's poker hand and the game just about ended.

It's October 2008 all over again.  If you believe this trading error nonsense, you deserve what's coming.

Tomorrow is going to be real, real interesting.  The real story of what happened today from 2 PM to 4 PM on Wall Street is going to make a hell of a story for somebody in the business.  Been a while since I've gotten to drag out the Dead Cat Bounce tag, and there we are.

[UPDATE] CalcRisk's take:

There are two rumors: The first is that there was a trading error (fat finger of a E-mini SP future order), the second is that Euro banks are having a liquidity problem of some sort. Neither is confirmed.

I'm leaning towards two myself. Felix Salmon is leaning towards one.

It’s been a very impressive day to learn how the stock-market sausage is made: I think we just saw the largest intraday fall, in point terms, that has ever happened. But the bigger lesson is that in the short term, any market can fail temporarily. The question is whether the jitters from this afternoon are going to mean increased volatility and risk aversion going forwards. My feeling is that, yes, they both will and should.

We'll see what happens going forward.

A Stimulatin' Development

The Kroog wants another stimulus package.

The United States risks a Japan-style lost decade of growth if it does not take aggressive action to stimulate its economy and clean up its banking system, Nobel Prize-winning economist Paul Krugman said on Monday.

"We're doing half-measures that help the economy limp along without fully recovering, and we're having measures that help the banks survive without really thriving," Krugman said.

"We're doing what the Japanese did in the nineties," he told a small group of reporters during a visit to Beijing.

He said it was not clear that China would suffer sub-par growth as a consequence of the fallout of the present crisis.

"I'm mostly worried that the U.S. and the euro zone will have Japanese-type lost decades," he said.

Krugman said he expected little or no employment growth this year or next in the United States, where the jobless rate in April hit a 25-year high of 8.9 percent.

"A second stimulus is becoming clearly urgent. They need a very, very strong stimulus," said Krugman, a Princeton University professor and a New York Times columnist.

Cleaning up the bank system is more important, I think. Even more important is dropping hardcore Plan N on the insolvent ones. But of course, politically neither will be possible until 2010.

And by then it will be far too late. When the euphoria of this Dead Cat Bounce wears off and the silly talk of a V-shaped recovery and 6% positive GDP growth in 2009 is put to rest, the reality that remains will not be pretty.

Obama will not be able to blame Bush for much longer. He will be able to blame the Party of No somewhat. But in the end, it'll be the ConservaDems that kill the economy.

The New Bubble

The new stock market bubble is in full effect.

Wall Street rose Monday, pushing the major gauges to multi-month highs, as a better-than-expected housing market report intensified hopes that the economy is closer to stabilizing.

The Dow Jones industrial average (INDU) gained 214 points, or 2.6%, according to early tallies, ending at the highest point since Jan. 13. The S&P 500 (SPX) index added nearly 30 points or 3.4%, ending above 900 for the first time since Jan. 8 and turning higher for the year.

The Nasdaq composite (COMP) rose 44 points, or 2.6% and ended at the highest point since Nov. 4.

Stocks have been surging over the last two months on bets that the worst for the economy is over. Those bets were furthered Monday by the day's economic reports.

But that's just it...the worst isn't over. We still have 14 million homeowners underwater and that's going to get worse. Unemployment continues to rise with 600,000 jobs a month being lost, and that will continue. Home prices still are falling, and there's a load of ARM that are primed to reset in 2009. The cramdown provision failed in the Senate, meaning it will be harder for Americans to keep their homes. The commercial real estate tsunami is just beginning...and all of it will only make any hope of recovery much dimmer, not much more likely. You can't have a recovering consumer-driven economy when wages are falling, inflation is on the way up and unemployment is rising. That's a recipe for another Japanese-style Lost Decade.

Yet the stock market has roared into a 30% gain in the last 2 months. The markets are betting hard on everything being over and America recovering like nothing bad happened. But the reality is nothing could be further from the truth. This is all a massive speculatory bubble. The slightest bit of news that shows that the economy isn't plummeting into freefall means BUY BUY BUY.

We're looking at one of the great Dead Cat Bounces in history here. The S&P 500 has gone from 670 to 900 in less than 60days. At this rate we'll indeed be back in Bush Boom territory by the end of the year. At 225 points in 60 days, we'd be close to 1,700 by 2010. That's impossible.

This one's going to pop, folks. It's not a correction. It's not a new bull market. It's a bubble, plain and simple. When this one goes, it'll flatten the economy.

CRE Is DOA

I've been warning you guys about the commercial real estate collapse for quite some time now, and we're starting to see that collapse accelerate to the point where the news media is picking it up.

A commercial mortgage meltdown is likely to prolong the nation's economic recovery. The falling prices in commercial real estate will lead to additional bank losses at a time when banks are sapped by home mortgage defaults and soaring credit card defaults. This could lead to future additional taxpayer assistance for the banks.

The reality is already on display. On April 16, the nation's second largest mall developer, General Growth Properties, filed for bankruptcy protection. The Chicago-based company owns more than 200 malls across the U.S., and was unable to renegotiate its debts as they came due.

Six days later, a 40-story office tower on New York's Avenue of the Americas was seized by its creditor, a Canadian-owned pension fund. The tower's owner, Macklowe Properties, couldn't meet loan terms.

"On the street, the rumor is it is coming and it's going to come fast and furious. Some people are predicting September," said Paul Waters, a New York-based executive vice president of brokerage operations in North America for NAI Global, a top-five commercial real estate brokerage with operations across the globe.

Just like the housing meltdown, the commercial real estate crunch is likely to begin as a slow bleed that gains momentum. The coming commercial real-estate crunch is likely to be spread evenly across the nation, in large part because of an outgoing economic tide that's spared few companies anywhere.

"There's going to be a lot of trouble on Main Street with some of these commercial and industrial buildings. The biggest impact will be on some of the smaller owners," Waters said. "The smaller local regional players that are stretched thin may have some great difficulties with their mortgages."

Wheels within wheels, death spirals within death spirals. This will only assure there will be no recovery in 2009 and there may very well be no recovery in 2010 either.

Don't be fooled by the quick recovery happy talk. It's not going to happen. It will continue to get worse. Just because the rate of your fall out of the airplane has hit terminal velocity doesn't mean you stop falling.

MEOW! BOING!

Roubini calls last week's rally "a dead cat bounce". I'd heed his advice if I were you.

So it is no wonder that Citi, Bank of America and JP Morgan can argue that they will be making this year a profit “before provisions for writedowns”. That is the most important caveat: while operational margins can be positive if you borrow at 0% and lend at much higher rates, the actual P&L and balance sheet of banks and broker dealers depends also on writedowns. And delinquencies, charge-off rates and writedowns are rising rapidly as both the loans and securities are showing mounting losses given the worsening of the economic recession. Losses are spreading from subprime to near prime and prime mortgages; to commercial real estate; to credit cards, auto loans and student loans; to leveraged loans and corporate boans; to industrial and commercial loans; to loans to real estate developers; to muni bonds and sovereign bonds of emerging markets and European economies where sovereign spreads are rising; and to the entire alphabet soup of credit derivatives that securitized these loans and mortgages (MBS, CMBS, CDOs, CLOs, CMOs, CPDOs, ABS, etc.). So for the major banks to argue that they are profitable before provisions on losses is a joke: such losses are now officially over $1.2 trillion globally (and $900 billion for US financial institutions) and they will be at least $2.2 trillion (according to the conservative estimates of the IMF and of Goldman Sachs) and as high as $3.6 trillion according to the peak time estimates of such losses according to our most recent study.

And according to independent analysts of the financial system – Meredith Whitney, Chris Whalen – charge off rates on loans – let alone additional losses on securities – are rising at alarming rates: they are already at levels twice as high as in the 1990-91 recession and they will soon enough – given recent trends be much higher double further. So, regardless of whether you got smarter management or not (i.e. it does not matter if you are JP Morgan and run by someone as brilliant as Jamie Dimon) the macro picture trumps any other bank-specific factors (the loan book of JP Morgan is as exposed to residential and commercial mortgages, consumer credit and other loans as any other major bank): i.e. with the unemployment rate going above 9% in 2009 and highly likely to reach 10% in 2010, with GDP growth likely to be 1% or lower in 2010, with home prices likely to fall – conservatively - at least another 15%, with commercial real estate rents now falling about 40 to 50% and valuation bound to fall 30 to 40% then losses on any category of banks loans and mortgages and consumer credit will sharply rise over time; and losses on the assets that securitized these loans/mortgages will increase over time.

In other words, this ain't the bottom kids. We're not out of the woods yet.

Not even close. We're going to soon be wishing the Dow was at 7,000.

The Bounciest Dead Cat Ever

Dow rockets up 936 points, or 11%.

``You're seeing finally the magnitude of the response that's necessary to restore confidence,'' said Richard Campagna, chief investment officer at Provident Investment Counsel in Pasadena, California, which manages $1 billion. ``Off the kind of decline we had last week I would look for a 20 percent move off the low.''

One hell of a rally for sure.

But what will tomorrow bring?

Fear Is A Great Motivator

...as the Senate moves up the timetable on a bailout plan vote from Thursday to Wednesday evening.

The Senate plans to vote on the $700 billion bank rescue plan Wednesday evening - two days after the House failed to pass it.

The bill adds new provisions - including raising the FDIC insurance cap from $100,000 to $250,000 - and will be attached to an existing revenue bill that the House also rejected Monday, according to several Democratic leadership aides.

The vote is scheduled for after sundown, in observance of the Jewish holiday. Republican presidential nominee John McCain and Democratic nominee Barack Obama and his running mate Joe Biden confirmed that they would be present for the vote.

So, I expect another good day on Wall Street tomorrow as CEOs dream of all the phat lewt they'll get from this, not to mention being able to lie about how much the toxic trash they have is worth. Asian markets are up 1.5% or so in anticipation of the screwing to come.

McSame, Obama, Biden all expected to be there to vote yes, I would assume.

We'll see how this affects the LIBOR and the credit spreads in about 8 hours or so.

MEOW! THUD! BOING!

Dead Cat Bounce SUPREEEEEEEEEEEME!

U.S. stocks jumped the most in six years as growing expectations that lawmakers will salvage a $700 billion bank-rescue package helped the Standard & Poor's 500 Index recover more than half of yesterday's 8.8 percent plunge.

JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. climbed more than 13 percent as Senate leaders vowed to resume work on the bailout plan this week after its rejection spurred the market's steepest decline in two decades. Hess Corp. and Schlumberger Ltd. added more than 5.8 percent as optimism about the plan helped oil rebound from a $10-a-barrel drop. All 10 industries in the S&P 500 advanced at least 1.3 percent.

``There is some renewed hope that Congress will come back and try to get the amended plan through,'' Robert Doll, who oversees $1.3 trillion as chief investment officer of global equities at BlackRock Inc. in Plainsboro, New Jersey, said in a Bloomberg Television interview. ``We have to restore confidence, we have to reduce fear, we have to get banks to lend money.''

The S&P 500 rose 58.34 points, or 5.3 percent, to 1,164.73, its biggest advance since July 2002. The Dow Jones Industrial Average jumped 485.21, or 4.7 percent, to 10,850.66 and earlier gained more than 500 points. The Nasdaq Composite Index added 5 percent to 2,082.33. More than four stocks climbed for each that fell on the New York Stock Exchange.

So, we won, right?

It's over?

Still, no.

My 17th Level Mutual Fund Manager Stops To Loot The Corpses

US markets have rebounded solidly in the Mother Of All Dead Cat Bounces.

A snapback in stocks wasn't unexpected as carnage on Wall Street often attracts bargain hunters, though questions remain about how investors will proceed. Without a bailout plan in place to absorb soured mortgage debt and other bad loans from banks' balance sheets, investors are wondering what might restore confidence in lending.

While stocks turned higher, moves in the credit markets were more ominous. The benchmark London Interbank Offered Rate, or LIBOR, that banks charge to lend to one another rose sharply Tuesday, making it more expensive and difficult for consumers and businesses to borrow money. In addition, credit card debt and more than half of adjustable-rate mortgages are tied to LIBOR, so an increase isn't welcome for many consumers.

LIBOR for 3-month dollar loans rose to 4.05 percent from 3.88 percent on Monday. LIBOR for 3-month euro loans, meanwhile, rose to 5.27 percent, from 5.22 percent Monday.

Many on Wall Street had expected the government's plan would help sweep away some of the fear and pessimism that has hobbled credit markets, which are where businesses turn to finance their day-to-day operations. The worry is now basic operations like making payroll will be difficult or perhaps impossible for some companies. Critics of the plan said, however, that it was too costly and wouldn't have done enough to jump-start lending.

Credit markets are still locked up and will remin locked up. If something isn't done to lower the LIBOR and soon, everything else will become academic.

Even worse, the source of every single one of these systemic problems can be traced back to the housing depression, which continues to rage on.

House prices in 20 U.S. cities declined in July at the fastest pace on record, signaling the worst housing recession in a generation had yet to trough even before this month's credit crisis.

The S&P/Case-Shiller home-price index dropped 16.3 percent from a year earlier, more than forecast, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

The housing slump is at the center of the meltdown in financial markets as declining demand pushes down property values and causes foreclosures to mount. Banks will probably stiffen lending rules even more in coming months to limit losses, indicating residential real estate will keep contracting and consumer spending will continue to falter.

And if banks stiffen their lending rules because of more bad mortgage paper writedowns, the credit markets lock up even more.

As important as it is to break up the LIBOR lockup blood clot to prevent an economic heart attack, it's just as important if not more so to realize that the heart itself is the housing market, and that heart is diseased. A very expensive transplant of sorts may be needed, or at least major bypass surgery...and the patient's insurance is held by the Chinese, y'dig?

AIG Aftermath

Things are moving quickly now. CNBC and Bloomberg are both reporting there's now a Fannie/Freddie style Fed conservator/takeover bid in the works where the government will end up running AIG.

American International Group may work out some kind of deal with the Federal Reserve to shore up its finances by the end of the day, CNBC has learned.

Under pressure from New York Governor David Paterson and AIG policyholders, the Federal Reserve is considering reversing its decision on Monday and providing some kind of financial aid to the troubled insurer.

Bloomberg reported late Tuesday that the Fed was considering some kind of conservatorship for AIG, which sent the firm's shares down in after-hours trading.

The Fed met with the company's advisers throughout the day and came to a better understanding of what is needed to help the company through its current crisis, people familiar with the negotiations said.

These people said there is hope that a Fed-funded plan could be reached by the day's end.

This goes FAR beyond a bailout. This is the complete Fannie and Freddie package, complete with stockholders getting wiped out as the debt is dumped on them.

As a result AIG is now trading under half of its closing value of $3.75 this afternoon, it's down to $1.80 a share and falling in after hours trading as of 5:30 PM.

If this falls through it's over, but if a conservatorship happens...then what? We've already nationalized the mortgage industry. We're well on the way to nationalizing the investment industry as well...and then the banks themselves are quite possibly next.

This is insanity. You can't buy the entire industry. Observe Bank of America snapping up everything it can get its hands on: it's going for Too Big To Fail. Look for more massive consolidation in the financials.

Today was the ultimate Dead Cat Bounce for the Dow.

Lehman Loses

$3.9 billion is a pretty healthy loss.

Lehman Brothers booked a nearly $4 billion quarterly loss Wednesday and announced a series of drastic steps aimed at reviving the beleaguered firm.

The firm said it would spin-off part of its commercial real estate assets, sell a majority stake of its investment management division and slash its annual dividend.

With no choice but to sell off what it can to stay afloat, the clock is ticking on yet another major investment bank.

Lehman's up to $9 in early trading. We'll see if it's the beginning of the new, leaner Lehman, or...DEAD CAT BOUNCE.

More Deceased Feline Physics Experiments

The Dow gave back basically all of yesterday's gains as the reality set in. Lehman Bros., the nation's fourth largest investment bank, lost half its value from Monday morning to Tuesday afternoon. The word on the Street is that Lehman is done. At this point it will drift lower until a buyer is found or one is appointed for it by the Fed in another sweetheart deal. Buyout rumors, usually a sure stock booster, failed to stop Lehman from falling 45% today alone.

That's because the Street is expecting another Bear Stearns deal, where the shareholders get nothing. After getting torched on Fannie and Freddie, investors aren't touching this leprous stock. Do you blame them?

Watch tomorrow's hastily called conference call tomorrow by Lehman to try to save the company.

My money's still on another Bear Stearns deal on Sunday. By Friday Lehman will be under $3. Maybe less. Fannie and Freddie are still under a buck. Lehman may be joining them. After that who knows? I'm still watching Wachovia, National City, and Citigroup. National City especially is in bad shape and has been for a long time.

We'll see.